Government developing secondary market for movable assets to improve access to finance for MSMEs

The government is a step closer to developing Jamaica’s secondary market for movable assets which will allow small businesses to access funding through asset-based lending (ABL) by using movable assets as collateral for loans.

This, after the publishing of findings of an assessment of secondary markets for movable assets in Jamaica by the World Bank’s International Finance Corporation (IFC). The assessment, which is the first of its kind in the Caribbean to be commissioned by the IFC, is focused mainly on the operations of small manufacturers and agro-processors.  It was conducted in 2020 and published recently on behalf of the Ministry of Industry, Investment and Commerce (MIIC).

Access to finance is one of the major issues confronting micro, small and medium enterprises (MSMEs), which is further exacerbated by the economic shocks caused by the current COVID-19 pandemic. Movable Asset Based Lending (MABL), the modality of utilizing moveable assets as a collateral mechanism for MSME financing, should now be front and center for consideration by capital providers. Movable assets, under this approach, would include non-traditional but valuable, portable and transferable assets such as agricultural produce, livestock, securities, machinery and equipment, accounts receivables and intellectual property.

For this financing mechanism to gain traction with capital providers, there would be need for a robust secondary market arrangement for the sale of repossessed movable assets. The term “secondary market,” (sometimes referred to as an “after-market,” or “resale market”) is used to refer to a system or place where a person or entity can transfer ownership of an asset. Secondary markets in MABL are typically used for the disposal of the assets and, in this instance, disposal is frequently referred to as a resale transaction, rather than an originating transaction.

Secondary market development is therefore an important and necessary component of a fully functioning secured transactions regime for movable assets. This, as a fully functional secondary market environment can help to create a comprehensive credit infrastructure where secured transactions provide an effective means of managing credit risk.  In other words, creditors can better manage their risk in lending to MSMEs with solid movable assets.

According to the World Bank report, lending based on the use of movable assets is much more common in developed markets, such as the United States, where more than 63 percent of loans to MSMEs are collateralized using movable assets. However, this is not the case in developing and emerging economies, despite that fact that movable assets represent as much as 78 percent of the capital stock of MSMEs in these countries relative to immovable assets (land and buildings) which amounts to 22 percent.

The report also highlighted the fact that the majority of MSMEs in developing countries are unable to use traditional assets to collateralize loans, due to the significant challenge in creating wealth on a sustainable basis. MABL is therefore rapidly becoming a viable option to manage credit risks with MSME lending. Economies with best practice secured transactions regimes include Mexico, Colombia, Peru, Vietnam, and China where increases in the use of MABL has resulted in increased financing to MSMEs, reduced credit costs and increased productivity levels.

This is good news for Jamaica’s MSME sector, as businesses constantly face challenges in accessing loans from financial institutions as they are considered risky investments. With MABL however, a business operator may access funding if he is able to present an asset that the creditor can readily value and dispose on the secondary market. On the other hand, if a market for such transaction is not readily available the creditor may be reluctant to accept the asset as collateral.

In recognition of this, the Government of Jamaica has moved to implement legislation and regulations for modernizing the secured transaction regime by passing the Security Interests in Personal Property Act (SIPPA) and establishing the National Security Interests in Personal Property Registry (NSIPPR) in 2013, thereby paving the way for the development of MABL as a viable modality for MSME financing. The registry allows for the listing of collateral assets used for financing and so creates a priority of interest among creditors. In other words, it allows a potential creditor to determine if another creditor has priority interest in an asset in order to avoid multiple claims on the asset and tracks transactions between creditors and debtors.

In its assessment of Jamaica’s secondary market for MABL, the World Bank report found that as of 2018, the number of registrations within the registry had increased by over 25,000 collateralized assets and that the top three types of collateral used for financing were motor vehicles, furniture, and securities. Motor vehicles represented 79 per cent of assets listed on the registry as it can be valued and disposed of easily relative to other assets used in the registry.

Nevertheless, the report pointed out that commercial banks were conservative in their lending choices, and that there is a need to improve accounting processes, project evaluation and reporting among MSMEs. The report also noted that consumers represented the majority of borrowers (over 63 percent) and over 83 percent of the collateral listed on the registry were used to secure individual loans. It went on to state that commercial customers represented just 5.7 percent of registry, with MSMEs representing 8.8 percent of the borrowers.

In light of the foregoing, the report highlighted that there is considerable scope for increasing the types of movable assets used as collateral to finance credit transactions, as well as, increasing the types of clients that utilize this form of borrowing. Main takeaways from the study included the need for investments in the establishment of robust secondary markets and implementing efficient and comprehensive technological platforms or portals that can: 1) facilitate trade of multiple types of movable assets and 2) bring together a critical mass of buyers and sellers from Jamaica and the wider Caribbean to facilitate a greater level of trade in movable assets. 

The platform should also provide key value-added features that support decisions and bridge institutional weaknesses in the Jamaican market. Such weaknesses revolve around the issues of asset valuation, screening of buyers and sellers, facilitating online payments and transparency in the pricing of repossessed assets for resale.

The report is a call to action for the private sector to consider investing in a robust secondary market system with efficient and effective digital platforms and infrastructure that allows for quick disposal of repossessed assets, thereby facilitating the growth and development of the MSME sector.

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